Mortgage rate sheets can look intimidating and ominous, not only to consumers, but to mortgage professionals as well. In today’s market, mortgage rates not only change daily, but are based on many factors specific to the individual borrower and loan. Knowing how to read a mortgage rate sheet gives you a valuable tool as you shop for a loan by taking the surprise out of the rate game. Most lenders now have interactive rate sheets on their websites, giving you the opportunity to input the details of your loan, and see the available rates and pricing for that day.
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This brief, five-step tutorial will tell you what to look for when reviewing either a printed or online rate sheet.
Find your program & term
What loan program and term are you considering? Program means the type of loan, (conventional, FHA) and term means the number of years. Most mortgage rate sheets will be organized by investor, not term. So if you want to compare 30 year conventional rates against FHA rates, you may need to look in different areas of the rate sheet. If you are considering an adjustable rate mortgage be sure to compare different fixed rate terms. Sometimes you can get a seven year ARM for close to the same rate as a five year ARM.
Par pricing, rebate, and points
Once you’ve found your program and term, the rate sheet will show a range of rates for that program. Each rate will show you the cost, expressed in basis points. Typically you want to look for the price closest to 0.0. This is called “par pricing.” Basis points expressed as a negative number mean a rebate is given, while a positive number means it is a cost to buy the rate, which is known as points.
Are points or the yield spread premium built in?
Oftentimes what lenders show as par pricing on their rate sheet, is not truly par. Be sure to check the list of fees to see if points, which may also be called a “loan origination fee” are built into the cost. What you first think is par pricing may actually cost a one percent loan fee.
Another way lenders can make their money is to price a yield spread premium (YSP) into the rate they quote to the customer. Mortgage Loan Originators need to know this as their benchmark for what their employer expects to make on the loan. While consumers seldom see the YSP themselves, they should compare different lenders as par pricing may vary quite a bit from one to the other.
Besides showing a range of rates for each program, rate sheets will also show a range of lock-in terms, usually for 15, 30, 45, 60 and 75 days. The shorter the term, the cheaper the cost for the rate. But long-term locks can be valuable to protect against market volatility. Most lenders have a minimum lock-in term based on their volume and underwriting capacity.
Loan level price adjustments (LLPA)
Most loan programs have adjustments for their rate prices based on risk. Some online pricing engines have these built in, but if looking at a printed rate sheet, you will need to calculate them manually. These LLPAs come from factors such as high loan to value ratios, low credit scores, and property type. They can make for a big surprise if not correctly calculated when the original rate was quoted.
Strengthen your position
Home buyers are bombarded with rate quotes—through the mail, through online adds, sometimes even over the phone. But seldom will these quotes be tailored to the specifics of your situation. By understanding how to read a mortgage rate sheet, and how to use lenders’ online rate platforms, you will go into loan negotiations in a position of strength.
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